Exercise

Chapter 9:
Absorption Costing and Marginal Costing

Notes: Some papers enclosed in this set of notes have been copied under a
license issued by the Pearson Education Asia Limited, Times Publishing
Limited and Hong Kong Examination and Assessment Authority. You are not
permitted to make any copies of this work, or to make it available to others. It is
important to understand and respect copyright.
Short Question 1
TKP Company produces a single product. The following figures are budgeted for the year ended
31 December 2011:

Selling Price $30/unit

©Gordon Chan x BAFS

 Direct materials cost $3
Direct labour cost $5
Variable manufacturing overheads $4
Variable selling expenses $2
Additional information:
(i) Fixed manufacturing overheads are budgeted to be $360,000 for the year.
(ii) Fixed administrative overheads and fixed selling expenses for the year are $250,000 and
$180,000 respectively.
(iii) The planned production and sales levels for the year are 90,000 units and 75,000 units
respectively.
(iv) There was no inventory of direct materials nor work-in-progress as at 31 December 2010.
(v) There was no inventory of finished goods as at 31 December 2010

REQUIRED:

(a) Calculate the respective values of closing inventory of finished goods by using the
following two approaches: (3 marks)
- Absorption costing
- Marginal costing

(b) Prepare a budgeted income statement for the year ended 31 December 2011 by using
the following two approaches:
- Absorption costing (4 marks)
- Marginal costing (5 marks)

Short Question 2
Tracy Wong Ltd manufactures a single product, a toy car. The following figures were
budgeted for the year ended 31 December 2011:

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 Budget information sheet for toy car
Selling price per unit of toy car $25
Direct materials cost per unit of toy car
$3
Direct labour hours required for 100 units of toy car
2.5
Wage rate ( $ per direct labour hour)
$60

Manufacturing overheads
--- Fixed ( $ per year) $240,000
--- Variable ( $ per unit) $ 3.2

Fixed administrative overheads ( $ per year) $213,000

Selling and distribution overheads

--- Fixed ( $ per year) $62,000
--- Variable ( $ per unit) $ 2.7

Production level ( Units) 50,000

Sales level ( Units) 45,000

Tracy Wong Ltd

There is no inventory of direct materials and work-in-progress during the year.

REQUIRED:

(a) Calculate the value of closing inventory of finished goods as at 31 December 2011
using absorption costing. Also, find the unit product cost of the toy car. (5 marks)

(b) Prepare a budgeted income statement for the year ended 31 December 2011 using
absorption costing. (4 marks)

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Short Question 3
Ferguson Company manufactures projectors for commercial use only. An inexperienced accounting clerk
of the company has prepared the following income statement for the year ended 31 December 2010 (based
on an output of 5,500 projectors):

$ $
Sales (at a selling price of 2,000 per projector) 10,000,000
Less: Cost of goods sold
Direct materials cost 2,475,000
Direct labour cost 3,300,000
Manufacturing overheads 1,925,000 (7,700,000)
Gross Profit 2,300,000
Less: Fixed Administrative expenses 630,000
Selling expenses 760,000 (1,390,000)
Net Profit 910,000

Additional information:
(i) On 1 January 2010, there was no opening inventory of finished projectors. On 31 December 2010,
there was no inventory of direct materials and work-in-progress.
(ii) During the year ended 31 December 2010, the manufacturing overheads contained fixed and
variable costs. Some costs for each projector were $270
(iii) During the year ended 31 December 2010, the selling expenses contained fixed and variable costs.
Some costs for each projector were $90.

REQUIRED:
(a) Prepare an income statement for the year ended 31 December 2010 using marginal
costing. (7 marks)

(b) Prepare a statement to reconcile the difference in the net profits calculated using marginal
costing and absorption. (2 marks)

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Short Question 4
Dream Company manufactures and sells one single product at a standard uniform price. It has adopted the
absorption costing system. Its budgeted income statement for the year ended 31 December 2011 is as
follows:

$ $
Sales (30,000 units sold) 3,600,000
Less: Cost of goods sold
Total production cost (32,000 units produced) 2,912,000
Less: Closing inventory (2,000 units unsold) (182,000) (2,730,000)
Gross Profit 870,000
Less: Administrative expenses 210,000
Selling and distribution expenses 760,000 (400,000)
Net Profit 910,000

Additional information:
(i) The total production cost consists of fixed and variable components. If the budgeted production in
2011 is 35,000 units, the total production cost will be $3,140,000.
(ii) The selling and distribution overheads also consist of fixed and variable components. If the
budgeted sales in 2011 is 35,000 units, the selling and distribution overheads will be $205,000
(iii) All administrative expenses are fixed in nature.

REQUIRED:
(a) Calculate the variable production cost per unit. (1 mark)

(b) Calculate the fixed production cost per annum. (1 mark)

(c) Suppose Dream Company turns to marginal costing system. Prepare the budgeted income
statement for the year ended 31 December 2011 showing the contribution margin and the
net profit (5 marks)

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Application Problem 1
On 1 January2011, Tom commences a company, BAFS Company, which manufactures only a single
product. The information about the company is as follows:

(i) The budgeted sales volume is 5,000 units per month. Each product requires 1 unit of
glass materials. Tom purchases the glass materials from mainland suppliers and the product
is processed in the factory in Hong Kong. 5,000 units of glass materials are supplied each month.
The purchases costs for the first quarter of 2011 are as follows:
Month Unit purchased Unit cost
January 2011 5,000 $30.0
February 2011 5,000 $32.0
March 2011 5,000 $32.5

(ii) Each direct labour hour can produce five units of products. The wage rate is $50 per direct labour
hour.

(iii) The rent for the factory is $2,000 per month. The annual rates and insurance expenses are $7,000
and $13,000 respectively. A factory supervisor is employed at a monthly salary of $15,000.
Moreover, the electricity charges for the factory are estimated to be $0.5 per unit of products.

(iv) All factory machinery and equipment cost $50,000. Depreciation is to be calculated at 20% per
annum on a straight-line basis.

(v) BAFS company rents an office for two years with a monthly rental of $4,000 commencing on
1 Jan 2011. Tom employs a general manager and two administrative executives at monthly
salaries of $12,000 and $5,000 respectively. They are also responsible for marketing and
selling the products. Therefore, the general manager and each administrative executive are
entitled to 4% and 1% of sales value as commission respectively.

(vi) The office furniture and equipment which cost $100,000 was purchased on 1 January 2011.
Depreciation is to be calculated at 10% per annum on cost.

(vii) The selling price of each unit of product is $150. The actual sales figures for the first quarter
ended 31 March 2011 are as follows:
Month Units sold
January 2011 4,700
February 2011 4,600

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March 2011 4,500

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REQUIRED:
(a) Prepare an income statement for the first quarter ended 31 March 2011 using the
absorption costing method. (Assume the FIFO method is adopted in the valuation
of unsold inventory) (7 marks)
(b) Prepare an income statement for the first quarter ended 31 March 2011 using the
marginal costing method. (Assume the FIFO method is adopted in the valuation
of unsold inventory) (6 marks)
(c) Prepare a statement to reconcile the difference in the net profits calculate in part (a)
with that of part (b). (2 marks)
(d) Discuss the differences between absorption costing and marginal costing in terms of
inventory valuation and profit determination. (4 marks)

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HKDSE BAFS 2012 DSE PP
SectionA2- Cost Accounting(Absorption Costing) + SQ(costing)

Perry Ltd started producing Product A on 1 January 2012. The unit selling price and cost of Product A for
the month of January 2012 was as follows:
($/unit)
Selling price 5.90
Direct material 1.20
Direct labour 1.40
Variable production overheads 0.70
Variable selling and administrative expenses 0.15

(i) Fixed production overheads were budgeted at $308 000 per month and were absorbed based on
the number of units produced. Actual fixed production overheads of Product A were the same as
the absorbed fixed production overheads for the month.

(ii) Budgeted production and budgeted sales were the same at 280 000 units per month.

(iii) Actual production and actual sales of Product A for the month were 250 000 units and 220 000
units respectively.

(iv) Actual fixed selling administrative expenses were $110 000.

(v) There were no closing direct materials and work-in-progress inventories of product A as at
31 January 2012

REQUIRED:

(a) Prepare the income statement for the month ended 31 January 2012 using absorption costing.
(7 marks)
(b) As compared with the absorption costing system, advise Perry Ltd two advantages of using the
marginal costing system. (2 marks)
(Total: 9 marks)

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HKDSE BAFS 2012 DSE
SectionA4- Cost Accounting (Marginal Costing)

Magic Company manufactures and sells a single product, Product X. For the purpose of preparing the
budget for Product X for the month of November 2012, following information is provided:

(i) The budgeted production and budgeted sales for the month are 5000 and
4400 units respectively.

(ii) The expected selling price is $300 per unit.

(iii) The direct material cost of the product is $40 per unit. An additional
transportation cost of $2 per unit is to be incurred for the purchases of the direct materials.

(iv) Each unit of product requires 2 hours of direct labour. The hourly rate of direct labour is $60.5.

(v) The production overheads of the product comprise a fixed and a variable element. It is the
company’s policy to apportion variable production overheads in relation to the number of units
produced.

Assuming the monthly fixed production overheads of the company remain the same in 2012,
the annual budgeted production overheads will $1 159 000 if 58 000 units are produced each
year, and $1 203 000 if 66 000 units are produced each year.

(vi) Selling and distribution expenses consist of a sales commission of $8 per unit sold and a fixed
monthly distribution expense of $50 000.

REQUIRED:

Magic Company adopts the marginal costing system. Assume it does not keep any inventories as at 31
October 2012, calculate the following for Product X for the month ended 30 November 2012:

(a) the budgeted total value of closing inventories (4 marks)

(b) the budgeted total amount of contribution (3 marks)

(c) the budgeted total amount of net profit (2 marks)

(Total: 9 marks)
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HKAL PA 2005 AL
Question2- Cost Accounting(Absorption Costing) + SQ(costing)

Yellow Stone Manufacturing Ltd commenced business in 2004 producing cleaning liquid Product X.
Each bottle of Product X contains 1 liter of raw materials.

The production budget for the year ended 31 December 2004 on the basis of 100,000 bottles is
shown below:
$
Raw materials ($10 per liter) 1,000,000
Direct labour ($2 per labour hour) 800,000
Factory overheads---fixed 200,000

Other budget information:

Selling and distribution expenses
Fixed $150,000
Variable $1 per bottle
Administrative expenses---fixed $400,000
Selling price $30 per bottle
Sales volume 90,000 bottles

REQUIRED:

(a) (i) Prepare the budgeted income statement for Product X based on absorption
costing to show the budgeted net profit for the year ended 31 December 2004. (5 marks)

(ii) How will the budgeted net profit differ if marginal costing method is used. (2 marks)

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